Kerala High Court
Commissioner Of Income-Tax vs Kerala State Cashew Development ... on 26 September, 1992
Equivalent citations: [1992]198ITR520(KER)
JUDGMENT T.L. Viswanatha Iyer, J.
1. This reference under Section 256(1) of the Income-tax Act, 1961 ("the Act"), is at the instance of the Revenue and concerns the reopening of the assessment made on the respondent-assessee for the assessment year 1972-73. The question referred is :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that no reasons had been recorded within the meaning of Section 148(2) and so the reopening is not valid ?"
2. The assessee, which is a public limited company wholly owned by the Government of Kerala, carries on business in the processing of cashew nuts. The original assessment was completed on February 28, 1974. The audit party made a note on August 20, 1974, which reads as follows :
"2. In the assessment order, weighted deduction under Section 35B is allowed on an amount of Rs. 3,66,547, being commission paid to foreign commission agents. From the details furnished by the assessee, it is seen that the amount of Rs. 3,66,547 on which weighted deduction under Section 35B has been claimed and allowed includes an amount of Rs. 1,77,181 being commission paid to Messrs. Drew Brown Ltd., Toronto, Canada. This party does not appear to be a commission agent ; but is only a direct buyer of goods from the assessee and what is paid to him as commission is actually 'trade discount' which does not qualify for weighted deduction under Section 35B. Therefore, the weighted deduction allowed under Section 35B on the commission of Rs. 1,77,181 paid to Drew Brown Ltd. has to be withdrawn. One-third of Rs. 1,77,181, viz., Rs. 59,060.
3. Development rebate on plant and machinery costing Rs. 1,40,041, is seen allowed at 25 per cent. on the ground that processing of cashew nuts is a priority industry eligible for development rebate at higher rate. Processing of cashew nuts is not a priority industry. Please see decision of the AAC, TVM, in Appeal No. ITA 202-0 of 1972-73 dated July 20, 1973, in the case of K. Ravindranathan Nair, A-Ward, Quilon PX 4144. So development rebate is allowable only at 15 per cent. Excess development rebate allowed to Rs. 14,002."
3. According to them, there were certain mistakes in the deduction allowed under Section 35B as also in the rate at which development rabate was allowed.
4. An office note was, thereafter, made in the order sheet on December 28, 1974, reading as follows :
"Please see IAP's objections. 154 notice put up. Hearing on January 10, 1975."
5. In the notice issued to the assessee under Section 154, proposing rectification of the assessment, the Income-tax Officer referred to the alleged mistakes in the order of assessment mentioned by the audit party as also another, pertaining to the amount of loss computed, and called upon the assessee to show cause why the assessment shall not be rectified. The assessee objected to the proposal with detailed objections, both regarding the merits as well as the jurisdiction to rectify the alleged mistakes, except in regard to the correct amount of loss which they admitted. The Income-tax Officer, thereupon, rectified the amount of loss arrived at in the assessment, but dropped the proceedings in relation to the mistakes pointed out by the audit party, with the note : "not to be rectified" on the assessee's letter of objections. Over one year thereafter, an entry appeared in the order sheet on March 15, 197G, namely. "148 notice put up". Pursuant to this, the Income-tax Officer issued notice of even date stating that he had reason to believe that income chargeable to tax for the year 1972-73 had escaped assessment within the meaning of Section 147 and calling upon the assessee to file a return of his income. The assessee objected. But the assessment was made in accordance with the audit note, withdrawing the weighted deduction under Section 35B on certain amounts originally allowed, and reducing the development rebate from 25 per cent. to 15 per cent.
6. The assessee appealed to the Appellate Assistant Commissioner of Income-tax who upheld the claims of the assessee on the merits and restored the benefits granted in the original order of assessment. Since the assessee was entitled to succeed on the merits, and there was no escapement of income, the other question of jurisdiction to reopen did not really arise for consideration. But the Appellate Assistant Commissioner entered a finding, with the observation that the audit note constituted "information" and that, therefore, the reopening was valid.
7. The Revenue appealed to the Tribunal. The Tribunal went into the question of the validity of the reopening in the first instance and since it upheld the contention of the assessee on this point, the Tribunal did not consider the case on the merits. The Tribunal noted that two conditions had to be satisfied before an assessment could be reopened under Section 147. One was that the Assessing Officer must have reason to believe that income had escaped assessment. This condition was satisfied going by the contents of the notice issued by the Income-tax Officer on March 15, 1976, wherein he had stated that he had reason to believe that income had escaped assessment. The other condition was the requirement of Section 148(2) that the Income-tax Officer shall, before issuing notice for making a reassessment under Section 147, record his reasons for doing so. The Tribunal perused the records of the case and came to the conclusion that this requirement had not been satisfied. The Tribunal stated :
"The learned Departmental Representative, in the background which we have set out, wanted us to construe that reasons have been recorded. He submitted that it is not necessary that the reason should be recorded at one single place in the order sheet or elsewhere. As long as the entirety of the records went to show that reasons had been recorded, he submitted the condition was satisfied. We agree with the learned Departmental Representative that it is not necessary that the reasons should be recorded at a single place in the order sheet. Nevertheless, we have to see whether on the materials set out, a reasonable inference can be drawn that reasons have been recorded. The assessee sent the reply to the 154 notice on January 6, 1975. After that for one year there is a gap. On March 15, 1976, there is the entry in the order sheet '148 notice put up' which was followed by the issue of the notice. We have already come to the conclusion that the Income-tax Officer had reason to believe that income had escaped assessment within the meaning of Section 147(b), but we do not find any material to warrant the inference even on a combined reading of all the correspondence to which we have referred that the Income-tax Officer had recorded his reasons for issuing the notice. He had proposed rectification under Section 154 for which he had set out reasons and on receipt of the assessee's reply he had passed the order 'not to be rectified'. The matter stood there. Thereafter the notice under Section 148 was issued after a lapse of one year. It is not possible to infer that the reasons recorded and the notice issued under Section 154 in respect of which proceedings were eventually dropped has to be considered as reasons recorded for reopening the assessment under Section 147 after the dropping of such proceedings without any further notation or reference to that aspect by the Income-tax Officer. We have, therefore, to come to the conclusion that reasons have not been recorded within the meaning of the provisions of Section 148(2) before issuing the notice under Section 148."
8. The reopening of the assessment was, therefore, without jurisdiction. The Departmental appeal was, accordingly, dismissed. The question of law mentioned earlier was thereafter referred for the opinion of this court.
9. We shall recount the notings in the notes paper as culled out by the Tribunal. The note of the audit party is dated August 20, 1974. We have already extracted it. The first entry thereafter in the order sheet is on December 28, 1974, and it reads as follows :
"Please see IAP's objections. 154 notice put up. Hearing on January 10, 1975."
10. Evidently, this is by the office. The next entry is "not to be rectified", by the officer, which appears on the side of the letter of objections of the assessee. The next entry in the order sheet is on March 15, 1976, and it reads "148 notice put up", obviously by the office. It is on the basis of these entries that we have got to see whether reasons have been recorded to satisfy the requirement of Section 148(2). Section 148 reads :
"48. (1) Before making the assessment, reassessment or recomputation under Section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, not being less than thirty days, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed ; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under Section 139, (2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so."
11. Sub-section (2) requires the Income-tax Officer to record his reasons "for doing so" before issuing any notice under the section. In Johri Lal (HUF) v. CIT [19731 88 ITR 439, the Supreme Court was dealing with a reopening under Section 34(1)(a) of the 1922 Act. It may be mentioned here that, under that Act, after its amendment in 1956, reasons had to be recorded only for a reopening under Sub-section (i)(a) of Section 34 corresponding to Section 147(a) and not for a reopening under Section 34(1)(b) corresponding to Section 147(b), namely, reopening consequent on information. The 1961 Act has departed from this provision and made recording of reasons obligatory for any action taken under Section 147, whether it be under Clause (a) or under Clause (b). The court observed that the formation of the required opinion by the Income-tax Officer that income had escaped assessment was a condition precedent for reopening an assessment. But that was not the only requirement. The officer was further required to record his reasons for taking action under the section and obtain the sanction of the Central Board of Revenue or the Commissioner, as the case may be. What is significant is that the Supreme Court considered the requirement to record reasons as important a condition as the formation of the opinion itself, to confer the necessary jurisdiction on the Income-tax Officer to reopen the assessment under Section 34. In P.V. Doshi v. CIT [1978] 113 ITR 22, the High Court of Gujarat held that the three conditions precedent, namely, (a) formation of the required opinion regarding escapement of income, (b) recording of reasons under Section 148(2), and (c) sanction of the appropriate authority under Section 151, had to be fulfilled before initiating any proceedings for reassessment. They have been introduced by way of safeguards in wider public interest by way of fetters on the jurisdiction of the Income-tax Officer to reopen a finally concluded assessment. They could not be said to be merely for the benefit of the individual assessee concerned, so that there was no question of these requirements being waived by an assessee. All these conditions were mandatory and had to be fulfilled before the Income-tax Officer could exercise the jurisdiction to reopen an assessment. In CIT v. Thakurlal [1981] 132 ITR 398, the High Court of Madhya Pradesh dealt with an analogous case with a mere noting by the Income-tax Officer that the payment of Rs. 45,000 was not an allowable expenditure. It was held insufficient to be a recording of reasons for the purpose of Section 148(2). The court affirmed that recording of reasons before issuing a notice under Section 147(b) was a mandatory requirement. S.P. Divekar and A.P. Divekar v. CIT [1986] 157 ITR 629 is another case where the Bombay High Court held the requirement to record reasons to be mandatory. Inter alia, they referred to the decision of the Supreme Court in Chhugamal Rajpal v. S.P. Chaliha [1971] 79 ITR 603, where it was noted that when the provision required the Income-tax Officer to give reasons for issuing a notice, it required him to show that he had prima facie grounds before him for doing so, this being an important safeguard to the assessee.
12. It is clear from the scheme of Sections 147 and 148 that the prescription of recording of reasons in Section 148(2) is mandatory and is an essential condition required to be fulfilled to vest jurisdiction in the Income tax Officer to proceed to reopen an assessment under Section 147. This is all the more so because the belief which the Income-tax Officer should entertain before issuing the notice should be based on materials. It is true that the sufficiency or the adequacy of the reasons will hot be gone into by a court. But the existence of the belief, and as to whether they were based on relevant factors and circumstances is a matter which could be gone into by a court. The reasons which the Income-tax Officer records constitute material on which the validity of the belief entertained by him can be tested. They constitute an important and essential part of the proceeding the absence of which will nullify the entire proceedings as without jurisdiction.
13. We have already extracted the notings in the order sheet. Nowhere in the notings can we find any recording of reasons by the Income-tax Officer for the reopening under Section 148, as required under Sub-section (2) thereof. The first note made after the report of the audit party was one evidently made by the office when they put up the notice under Section 154. The next noting "not to be rectified" is no doubt an order of the Income-tax Officer. But that is not a recording of reasons, but a decision to drop the rectification proceedings. The next note on March 15, 1976, is again one made by the office. The Income-tax Officer follows it up with a notice under Section 148. Admittedly, there was no recording of reasons at the time the notice under Section 148 was issued--or even earlier, according to us. But then, counsel for the Revenue maintains that the earlier notings will do justice for a recording of reasons and, according to him, the finding of the Tribunal is that there was a recording of reasons at the time of the issue of notice under Section 154. We are unable to agree.
14. Even the very first note made was one made by the office which merely referred to the audit party's objections. At that stage, the officer did not record his reasons for concurring with the audit party or as to why the assessment requires either rectification or reopening. He had no occasion to apply his mind to the question at that stage. In fact, the recording of reasons required under Section 148 should not merely relate to the reasons which led the officer to the belief that income had escaped assessment, but also should indicate the existence of the other ingredients of Section 147 justifying the reopening. All that is lacking in the case.
15. Actually, there was no recording of reasons at all at any stage, though counsel for the Revenue was at pains to infer a recording of reasons at the stage the notice under Section 154 was issued. According to him, the finding recorded by the Tribunal is that there was a recording of reasons when the notice under Section 154 was issued, and that is a finding of fact which is conclusive. We cannot agree. For one thing, we have the entire notes paper extracted in the order of the Tribunal which does not show any recording of reasons at any time. What the Tribunal had indicated was only the narration of the mistakes made in the notice under Section 154 and no more.
16. Even otherwise, we are of the opinion that the recording of reasons, if any, in the proceedings under Section 154 is not sufficient to sustain the independent proceedings under Section 148. In fact, initiation of proceedings under Section 154 does not require any prior recording of reasons at all. The assessee has only to be apprised of the mistake and afforded an opportunity to show cause against the rectification. The proceedings under Section 148 are of a different nature hedged in by conditions and resulting in the reopening of a concluded assessment. The officer has then to apply his mind to the question with reference to Sections 147 and 148 and record his reasons for the reopening. The alleged anterior recording of reasons in the proceedings under Section 154 will not therefore suffice for, or be compliance with Section 148(2). What the provision requires is a recording of the reasons which prompted the Income-tax Officer to reopen the assessment under Section 148. He must record his reasons at that stage. Any anterior note by the officer in the order sheet without any indication as to whether the officer's attention had been drawn to it is not sufficient for the purpose of Section 148(2), The requirement is mandatory and, unless there is a strict compliance with the same, the entire action will stand vitiated. (See CIT v. Kurban Hussain Ibrahimji Mithiborwala [1971] 82 ITR 821 (SC)).
17. Counsel for the Revenue argued, based on the statement in paragraph 9 of the order, that the issue of the notice on March 15, 1976, with the recital that the Income-tax Officer had reason to believe that income chargeable to tax had escaped assessment, leads to the inference that reasons had actually been recorded by the officer. Such a contention cannot stand in the light of the admitted notings in the order sheet which we have extracted earlier. The fact that the officer had reason to believe that income had escaped assessment does not lead to any inference that reasons had actually been recorded. That is a separate requirement which had got to be satisfied by the Income-tax Officer before clutching at jurisdiction to reopen an assessment. We overrule this contention.
18. The Tribunal was, therefore, justified in holding that the assessment proceedings were lacking in jurisdiction inasmuch as the essential condition precedent for the issuance of the notice under Section 148, namely, the recording of reasons under Sub-section (2) thereof, had not been complied with. We are in agreement with the view taken by the Tribunal. The question referred to us has, therefore, to be answered in the affirmative, that is in favour of the assessee and against the Revenue. We do so.
19. Communicate a copy of this judgment under the seal of this court and signature of the Registrar to the Income-tax Appellate Tribunal, Cochin Bench.